Record labels cash in on Spotify's listing

New York

IN the music industry, one of the biggest issues hanging over Spotify's arrival on the New York Stock Exchange has been what the major record companies would do with the billions of dollars in equity they held in the streaming service.

One answer became clear Wednesday, when Sony announced it had sold 17 per cent of its stake in the company for more than US$250 million.

The transaction was made Tuesday, the day Spotify began trading on the exchange, Sony said. Spotify had closed its first day with a market valuation of US$26.5 billion.

In Spotify's early days, record companies viewed the streaming service's hybrid business model of both free and paid streaming as a potential risk that could undermine the sales of CDs and downloads. So as a condition of granting licences for their music, the labels received chunks of equity.

As things turned out, sales of CDs and downloads have plunged dramatically in the last few years, although the quick rise of streaming has increased the recording industry's revenues overall.

What the labels would do with any profits from selling their Spotify stakes has been a subject of debate in the industry. The labels have said they would share the profits with their artistes but have offered few specific details about how those payments would be calculated.

The Worldwide Independent Network, a trade group for small music labels, has called on the major labels to share that money with the independent labels they distribute.

Among the majors, Sony had the largest share in the company, with about 5.7 per cent, according to Spotify's prospectus. The stakes owned by the other two big labels, Universal and Warner, were not disclosed but are believed to be 4 per cent or less. Merlin, an organisation that represents independent labels in licencing negotiations, also has a stake.

Sony said it had sold 17.2 per cent of its position in Spotify on Tuesday. It offered no further details of the transaction, but if it was made at Spotify's closing price of US$149.01, the sale would be worth US$260.5 million. If the sale occurred at the opening price of US$169.50, it would be US$296 million.

Sony also announced Wednesday that it would book a profit of 105 billion yen (S$1.29 billion) for its fiscal first quarter, attributed to both its sale of the Spotify stock and the value of its remaining stake.

For the big labels, the question of whether - and when - to sell their Spotify equity ties in with a potential risk when it comes to dealing with their artistes. If the labels sell right away, they may be accused of prematurely cashing out; if they wait, they may be accused of holding on too long to money that they have said belongs to their artistes.

Representatives of Universal, Warner and Merlin declined to comment, but no transactions related to those companies' stakes in Spotify have been announced.

A spokeswoman for Sony Music on Wednesday declined to comment on any details of Sony's transaction. But on Tuesday, before the market opened, Sony and The Orchard, its independent distribution arm, released a brief statement saying they were "committed to sharing with their artistes and distributed labels any net gain they may realise from a sale of Sony Music's equity stake in Spotify". NYTIMES